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Solving the challenges of xVA management: How Danske Bank did it

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ActiveViam_Standard_logo_RGBThe complexity of calculating xVA coupled with the need to meet regulations and to balance risk capital has been a challenge for all banks. For this reason, Danske Bank created and developed an innovative solution and method to tackle it.

Denmark’s largest bank, Danske Bank, was ahead of the curve in managing the complicated task of xVA, creating an advanced system for calculating xVA figures known as Adjoint Algorithmic Differentiation (AAD).

However, they needed an equally advanced system to match the AAD output, one that would enable real-time risk analytics. Common solutions were unable to cope with the massive volumes of data or offer an interactive experience with on-the-fly drill-down capabilities and multidimensional analysis.

The bank instead turned to something they had been using internally for market risk because of its proven performance. They chose ActiveViam’s ActivePivot, which was already being used in other parts of the bank since 2015, and which enabled them to meet the xVA challenge and implement the solution in record time.

ActivePivot is an in-memory data analytics and aggregation engine developed and published by ActiveViam. What the ActivePivot implementation delivered to Danske’s xVA Desk was the ability to perform real-time analysis on the entire derivatives portfolio and manage the many moving parts of an xVA desk.

The deployment allowed Danske Bank analysts to drill down to the most granular level of detail in real-time, examine the reason for an anomaly and perform adjustments as neededwith no need to continually go to IT to request help. In many banks, IT resources can be scarce at times and the autonomy ActivePivot afforded to the business teams was another key reason for choosing ActivePivot.

As Nicki Rasmussen the Head of the Danske Bank xVA Desk put it, “The ability to look at all the different risks was a huge step for us, saving us a lot of time not just in a single day but for every single end of month - for the full year. That was the true benefit for us – to be able to drill down quickly within seconds, not hours or days, to create a new report if something looked odd.”

Overcoming the big data challenge

xVA represents a huge challenge for banks, especially under current circumstances as the 2020 global pandemic has shaken the global economy and caused a large number of credit impairments and loan defaults, which in turn, can affect any number of elements in a derivatives contract.

Mapping costs to a specific counterparty’s netting sets is a crucial task in this scenario and one that the xVA desk is responsible for.

Managing xVA requires the analysis of an enormous amount of data, and therefore a set of highly sophisticated tools. This is essential for business performance as mismanagement of the xVA numbers can negatively impact a bank’s ability to generate revenue.

“ActiveViam technology came into play when we realized that the number of market data elements and risk sensitivities and the level of granularity we needed represented a volume of data so huge that we couldn’t deal with it in a timely fashion to explain changes in risk and changes in value,” Mr. Rasmussen said.

The solution, built by Danske Bank’s teams with support from ActiveViam, readily surmounted the massive task of aggregating xVA data, making it digestible for risk analysts to manage successfully. Since the implementation, the use of ActivePivot has grown to keep pace with Danske Bank’s hierarchies and instrument classifications as they have evolved and expanded over time – without the need for any analytical modifications since the data and the analytics remain separate.

Check out the case study “Danske Bank: Overcoming the xVA Challenge” to learn more about this achievement.

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